Trade of the Day: Microsoft (MSFT)

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Sometimes the best trades are, well, the best trades. Microsoft (MSFT), the old fuddy duddy, is now trading at 15-year highs after a nearly 30% run over the last three months. It consolidated around $54 for most of November, and it is now showing signs of breaking out.

This has been one of my top trades recently. I’ve recommended the stock in my Absolute Capital Return service (and we still own it there), and we’ve been in and out of call options three times in a little over a month, earning 12.3% (in one week), 12.3% (in one day) and 10.6% (in one day).

MSFT made a big move in late October, leaping 10% overnight following its earnings report. The company has kept faith with Wall Street over the last few years as management works to streamline areas of the business that aren’t working while taking shots on potentially transformative ventures like tablet computing and the Cloud. The latest numbers revealed that the trends are pointing the right way again a few months ahead of schedule.

The chart was starting to look like it was running out of steam after gapping up. However, analyzing internal flows revealed that shares weren’t likely to trade in a narrow channel forever. Traders had been accumulating on the rising days far more aggressively than they sold the dips, reflecting a significant imbalance between bulls and bears.

Granted, we’re dealing with a massive float, so that imbalance barely represented 2% of all MSFT on the open market. However, only a few percentage points of tightening supply can be enough to push the price upward if demand remains anywhere near stable. From the continued pattern of robust buying days and thin profit-taking spurts (which you can see by the bigger gray volume bars on the chart below), MSFT had that stable demand to work with here.

MSFT

In terms of resistance, MSFT is already above all price levels since early 2000, so the key moving averages (9-, 50- and 200-day) are below and acting as relative support.

The recent earnings helped push the bar upward. Before the quarterly release, Wall Street seemed comfortable trading MSFT at around 17.5X a current earnings target of $2.70. Even if the company’s $0.08-per-share windfall was only an isolated fluke, consensus has still crept up enough to justify a richer growth premium. And with the prospect now open that last quarter is only the start of a new expansion cycle, I suspect the targets are still too conservative.

I was confident the stock would punch above $55, which it did Wednesday, so we’re now looking at a possible breakout move. I’ve noticed some activity in call options as well, so traders are clearly bullish at the moment. If the new MSFT can hold onto even a fraction of the traction it showed last quarter, this could be a $60 stock or higher without too much heartbreak, which is why this is still a very attractive trade here.

Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.


Article printed from InvestorPlace Media, https://investorplace.com/2015/12/msft/.

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